How to price options using payoff diagrams (Buy 1 Call, Buy 1 Put & Sell 2 Puts)

In this video, we walk through a step-by-step option strategy question that’s perfect for anyone studying finance or preparing for exams. We’ll start by exploring a scenario where two investors, Jake and Sarah, are building a portfolio using call and put options, alongside selling put options. The main focus is on understanding the payoff diagrams, calculating profits, and determining the payoff for each position. We’ll cover key concepts like options, strike prices, premiums, and the difference between buying and selling options. By the end, you’ll be ready to solve options-related exam questions with ease, using a payoff table to simplify complex calculations.

Timestamps:
0:00 – Introduction: Walkthrough of options exam question
0:29 – Setting up: Jake and Sarah’s portfolio choices
1:09 – Modifying the question: Adding put options
2:17 – Key concept: Payoff tables and their importance
3:18 – Step-by-step: Drawing the payoff diagram
4:48 – Identifying stock prices for the payoff table
6:02 – Finding the upper and lower bounds for stock prices
9:18 – Defining positions and calculating payoffs
11:23 – Understanding call options and their payoff
13:02 – Exploring put options and their payoff
14:52 – Selling put options: Calculating potential profit/loss
16:39 – Final payoff calculations and results
19:35 – Extra analysis: Expanding the payoff diagram